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Why are online fraud and identity theft growing exponentially?

As we add more nodes, Networks grow exponentially in number of connections and complexity. With billions of connected devices, the Internet has become more complex than any other human invention. Nevertheless, we continue to believe that we are in control of the Internet and that we can predict or prevent what happens within it.

Other networks of different nature, such as the economy or the payment industry, have also grown in complexity. The simultaneous growth of all these networks has triggered an exponential increase of insecurity and fraud. In the US today, 94% of all fraud and theft is done through digital means. Identity theft -which includes credit card fraud- has grown at rates of 300% per year and is a black market now bigger than illegal drug trade.

Your credit card, signature and logins are all part of your identity. Digital representation of our identities can now be massively stolen, identically counterfeit and anonymously used. The laws that previously protected against these abuses are no longer useful since the perpetrators are usually abroad. The financial industry and the existing technologies and processes are not ready for a borderless and massive threat such as this one.

Why is it out of control?

Most people continue to believe that the economy or the stock exchange are predictable. In the same way, we would like to think that what happens in the Internet and on our corporate networks is under control. Spam, security breaches, identity theft, Internet fraud, information leaks, malware, spyware and even cyber warfare are all happening, all the time, everywhere. Nevertheless, they are not predictable. We cannot control what we do not know.

What is the industry doing about it?

The information security and fraud prevention industries have quickly grown in the past few years. All developments though, continue to be centered in the same two mechanisms: authentication-based filtering and anomaly-based incident response. All security mechanisms that strive to protect confidentiality and integrity will always rely on a combination of these two models.

To authenticate digitally we use usernames and passwords, certificates, process IDs, IP addresses, cookies, tokens, one-time-passwords, biometrics and even credit card numbers are a kind of authentication. If these credentials were correctly verified and authorized, monitoring and alerting would not be necessary. But all of them can be copied, brute-forced, sniffed, spoofed, cloned or used through man-in-the-middle attacks.

Digital authentication is fallible, therefore filtering that relies on this authentication will only stop part of the attacks. The rest should be detected by finding anomalies. Antivirus, antispyware and intrusion prevention systems work this way. Nevertheless, determining anomalies is much harder than authenticating. Most systems rely on signatures of known attacks or malware, organized into blacklists. Others use expert systems were thresholds or suspicious actions are pre-defined by experts. Still others use heuristic approaches or basic neural networks that try to find anomalies.

Why is it not working?

The main problem is authenticating. An attack may be part of a legitimate network packet, a legitimate application, a legitimate user or even legitimate credit card number. It may be impossible to distinguish a fraudulent transaction or a network attack from a legitimate action. Stopping known attacks is sometimes easy because you can search for the same patterns. But stopping a new kind of malware or a fraud in a credit card’s first purchase may both be impossible with the current state-of-the-art. Criminals know this and continuously work to circumvent detection. If they steal login credentials or card information and impersonate real users, most times there will be no easy or cost effective way to deter them.

Effort is another problem that arises. Most end-users, credit card holders or even system administrators are not willing to put in more effort just to be more secure. If you ask a card holder to call the issuer in order to verify his transaction, he will most probably just switch cards. The same will happen with almost all security authentications. If there is an easier way, most people will take it. And if businesses or financial institutions risk losing customers or transactions because of increased security, they will most probably back off. If the amount is not too high, they can always charge everyone a small premium next year to make up for fraud losses. Card users pay back through increased prices, interest rates and fees. The worldwide card industry now absorbs over a hundred billion dollars in fraud each year. The only beneficiary being, organized crime.

Internet banking, money orders, bank wire transfers, Internet trading, online auctions and all kinds of digital transactions have the same problems to authenticate users and react to fraud. If we talk about network or host intrusion prevention, they also have similar weaknesses. The main problem is that there is a large gray zone between what is considered normal behavior and the real anomalies.

All prevention systems have very high rates of false-positives and false-negatives. All networks, merchants, processors or financial institutions still use humans to try to filter out these gray zones. The volume is so high that what are considered to be lower threats may be automatically passed. And if they believe there is a possibility of alienating a legitimate customer, they will most probably allow the transaction. Finally, there are large amounts of human mistakes or omissions.

How would a solution based on Numenta’s HTM be able to reduce these fraud levels?

Numenta has developed the most advanced artificial intelligence engine to date. This technology known as Hierarchical Temporal Memory (HTM) emulates the human neo-cortex and is capable of predicting patterns based on previous learnt experience. Their technology will forever change the way computers synthesize information, recognize patterns and predict future behaviours.

To reduce fraud, the financial institution’s main challenge is to authenticate their users in such a way it prevents others from impersonating them. And they should do this without increasing user effort (several authentication mechanisms) or merchant costs (such as biometrics or new devices).

By using Numenta technology this can be reversed. Instead of trying to authenticate persons based on additional on-site security mechanisms, HTM networks should allow us to centralize prediction and respond with a level of certainty for each particular transaction. An HTM network would compare the transaction against the prediction for that particular user and deliver a level of certainty for the legitimacy of the transaction.

The solution we are working on will try to predict the behavioral patterns of users. This would allow us to authenticate each user individually, not only based on their login or card number, but also based on their transactional pattern such as frequency of use, types of transactions, geographical proximity, serialized purchases, etc.

Employing conventional technology would require customizing rules by hand for each cardholder or Internet banking user. This would be almost impossible. In addition to this, the speed required to query and answer thousands of transactions per second may be impossible to reach with other solutions.

By using Numenta’s HTM technology to learn individual behavioral patterns beforehand we not only expect to predict the most probable next clicks or transactions, we should also be able to do so in a fraction of a second.

Recently they kindly translated into Spanish and published an essay I wrote on “Transitioning Mexico into a Knowledge Economy” in El Universal, a good Mexican newspaper. I decided it would be a good idea to include the original English version in my blog.

Transitioning Mexico into a Knowledge Economy

Mexico has a geographic complexity that has limited its ability to develop and maintain traditional infrastructure. These historical limitations would be overcome if our future competitive advantages and our focus as a country were set on developing a Knowledge-based society. The resulting Knowledge Economy completely changes the existing paradigms in relation to growth, competitiveness, employment and social development.

Mexico’s challenges

Amongst the main aspects that have limited Mexico’s infrastructure development has been its geography. Several mountain ranges and two peninsulas cut out and segment our country into small pieces. Building infrastructure -such as highways or railways- to properly connect these pieces has proven to be very expensive and difficult to accomplish. As a country, we will continue to fall short on the infrastructure requirements of our growing economy; and in turn the lack of infrastructure will continue to constrain our potential growth rate.

The Knowledge revolution could be Mexico’s opportunity to leapfrog some of these historical limitations. In a Knowledge Economy, geographical barriers are far less important. High speed networks make distances irrelevant allowing education, services and information to flow seamlessly to those places that can benefit from them. All aspects of the economy and all connected geographical areas can grow and develop as a result. This could be the pivoting point to trigger future economic growth, competitiveness, employment and social development in Mexico.

Knowledge Economy

The term Knowledge is very broad and has led to different interpretations of what a Knowledge Economy is. Information and Knowledge are even used interchangeably. What distinguishes knowledge from information is the way in which knowledge empowers actors with the capacity for intellectual or physical activity. Therefore, a Knowledge Economy interprets available information and embeds this knowledge into its products and services increasing value. The economics are no longer based on scarcity, but rather on abundance. Unlike most resources that deplete when used, information and knowledge can be shared, and actually grow through usage.

“Economic success is increasingly based upon the effective utilization of intangible assets such as knowledge, skills and innovative potential as the key resource for competitive advantage. The term “knowledge economy” is used to describe this emerging economic structure.” (ESRC, 2005)

“…the idea of the knowledge driven economy is not just a description of high tech industries. It describes a set of new sources of competitive advantage which can apply to all sectors, all companies and all regions, from agriculture and retailing to software and biotechnology”. (New measures for the New Economy, Charles Leadbeater, June 1999).

Developing a Knowledge Economy in Mexico

There are at least three aspects to consider in developing a Knowledge Economy:

A new kind of infrastructure has to be built. An information-based society requires abundant Internet bandwidth and plentiful online information.

A knowledge economy also poses new threats; legislation has to change dramatically to accommodate borderless organizations, remote workers and foreign criminals.

Knowledge clusters must be incentivized and nourished. Public policy should be focused on transitioning Mexico’s existing strengths into knowledge clusters, instead of trying to develop new ones that could take decades.

The Knowledge Revolution

By interconnecting millions of information systems, humanity has profoundly changed the rules by which states have thrived in the past few thousand years. The Internet is not only the main catalyst behind the knowledge economy; it may also be the biggest economic and social disruptor we have faced.

Countries are now at risk of becoming commoditized. Knowledge workers are highly mobile and can choose where they want to work, as well as where they want to live and pay taxes. It is becoming everyday more common to live in one country and work remotely in another one.

New Rules

With the advent of the Internet, the rules of the game have completely changed. Geographical proximity had always been an invisible organizational force behind human settlements, laws, taxes, businesses and countries. Since the first states were founded, they mainly provided two things to their citizens in exchange for taxes: security and public infrastructure. Both still need to be provided within a Knowledge economy. However, it is very complex to provide public infrastructure and security given the lack of boundaries in knowledge and information. Proximity is no longer the main organizational driving force.

Infrastructure

To enhance the Knowledge infrastructure, Mexico could start by creating a National Network with a backbone capable of connecting all major cities, universities, research facilities, hospitals and public libraries at very high speeds. Bandwidth must be an abundant resource in a knowledge economy for it is the best conduit for using, sharing and selling knowledge.

Additionally, collaboration and federated sites should be created. Networked data-bases such as theses should promote online interaction between users and producers. Citizens must get involved in creating, editing, linking and validating content. By using an unregulated model, information and knowledge start flowing and accumulating exponentially.

Mexico could also transform or further develop some of its beautiful natural touristic locations into Knowledge parks. These parks would have all the required technology, communications, facilities, housing and schools to allow foreign knowledge workers and companies to work remotely. Knowledge workers are always looking to increase their quality of life; this could be a good way to attract them.

Security

On the other hand, providing digital security is now most times beyond the country’s reach; cybercrime is global. Anonymous and borderless fraud is the fastest growing problem for all countries, including Mexico. Most criminals now live beyond the grasp of the laws they break. They can easily buy credit card numbers over the Internet and use them to steal money without ever leaving their chairs. States are having a very hard time adapting geographically limited laws to include worldwide crime. International treaties and coordinated efforts may be the only way to reduce this threat.

Knowledge Clusters

Equally as difficult, states will want to benefit from the knowledge created, sold or consumed within. Countries will have to compete to attract corporations and knowledge workers into their territory. Or in a better scenario, they need to find ways to have them spun and develop within their country. This requires local knowledge clusters.

The ecosystem required for these knowledge clusters to emerge and mature is complex and not easy to generate artificially. A country has to focus on its existing industrial clusters and incentivize the transition into Knowledge clusters. Even then, clusters are difficult to find and there are few examples of industries that could transition. Finding them is in itself one of the biggest challenges.

One example could be the Mexican entertainment industry. Mexico has had a long tradition of producing everything from worldwide viewed soap operas and movies, to famous actors and singers. The industry is still healthy and thriving. Nevertheless, it has completely missed the knowledge revolution. The video game industry is now bigger than both the movie industry and the music industry. At the current pace, it will outgrow the television industry revenue within a few years.

In Mexico alone, videogames sales will be over a billion dollars by 2010. Nonetheless, Mexico has yet to produce a single videogame. By placing proper incentives and infrastructure Mexican entertainment industry could be drawn into this new media. Most of the talent and resources are already in place, it just needs to evolve. As this one, other knowledge clusters could emerge if a focused effort was to be made by the government to find and nurture them.

Disruptions open New Opportunities

It is in disruptive conditions such as these when the playfield is leveled and new opportunities emerge. Mexico will need to act decisively to take advantage of this Knowledge revolution. We need to focus on creating a better future. We need to jump at this opportunity to transform our country.

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Defining your Personal Focus may be the single most important decision (or series of decisions) in life. What you spend your energy and attention on today, will make a big difference within a few days, months and even years.

What continues to amaze me is how often I have to reassess my priorities and redefine my focus. It seems to be a moving target; an open question that should never be completely answered and that needs to be revisited frequently.

I wrote about focus in my previous post. Personal focus though, is something that needs to be defined. Today I have been once again questioning myself on how to reset my priorities and how that may affect my long-term focus.

My personal focus is the guiding star behind all my projects and goals. It defines the projects I undertake and the goals I set myself to accomplish. I have found three aspects to be important in defining my focus: sustainable motivation, personal strengths and economic feasibility.

1. Sustainable Motivation

Focus is all about sustaining attention and energy in time. There is no way I can sustain my attention if I do not start highly motivated. But perhaps, it is even more important to find a way for motivation to be reinforced in time as part of the process. We need a motivation virtuous circle to guarantee that our focus will be sustained long enough for it to be valuable.

I have little control over what motivates me. I can go as far as to influence myself indirectly, for example by reading a book. But in general I have to adapt to what is already my passion. Therefore, it is important to start with something I am currently highly motivated to do and be sure to check for future motivation feedback opportunities.

I should be asking myself what my desired outcome should be and how can I progressively get closer to it by receiving little doses of extra-motivation along the way.

In my case, I have found three main ways to build a positive motivation cycle, they are very personal and based on what makes me tick, but they should be a good example of what I mean.

Collaborator

My first motivation virtuous cycle is to “find a collaborator”. I have several times in life committed with someone to jointly develop a project or idea. Having a collaborator has been a key success factor for me in sustaining my focus through long personal projects, activities or goals.

By having a collaborator I have been able to write a theatrical play, develop software, travel to far away places, found new companies, exercise regularly, as well as build a Website and a computer with my son. My success ratio when I feel responsible for or committed with someone is far greater than what I have ever done by trying to commit to myself or to my personal projects. I do not want to disappoint those who trust me, I want to live up to what they expect from me. That is normally what keeps me going.

The only problem with this approach is that finding someone who is equally interested in a personal project is sometimes tough. For example, I have been trying to find a person that would like to write a book with me for the last two years to no success. On the other hand, hiring someone to help me has not had the same long term effect. When hiring someone, I do not feel personally as committed to him as when we are both investing our time and passion.

Sell a Project

My second motivation feedback mechanism is a variation to the previous approach. I shall call it “sell your focus”. As an entrepreneur I frequently get the opportunity to sell a project of something I want to do and which is aligned to my personal focus. When the opportunity arises, I define a project based on what I would like to be doing.

This generates the same kind of commitment as with the collaborator, with the added value of financing the endeavor and allowing for additional people to participate and help me. It is not very common, but when it happens it is the best way to get your long term focus sustained.

Sequential Commitments

My third motivation strategy is again similar to the two previous ones and good for shorter projects: “sequential commitments”. It is based on finding a series of opportunities and directing each one incrementally to something you would like to do.

You can even slightly over-commit in each iteration to increase pressure (in my case it helps motivate myself). Fine tuning here is critical. If I over-commit too much I end up unable to do it and frustrated. On the other hand, if the commitment is not challenging enough, I will sometimes postpone it or even fail to do it.

For example, I use lectures and conference talks for this purpose. I will normally try to influence the topic towards something I would like to study or develop.

Generally I will work very hard to read, prepare and deliver a talk in the best possible way. Giving talks is something that motivates me deeply; I can therefore be sly and include a topic I would like to research. Sometimes I also decide to develop or prepare a demonstration that is challenging. As a consequence I end up reading, writing and learning about something new, which in turn also motivates me.

I try to point all my talks towards my main focus. That way, every time I have the opportunity to speak, I move forward a bit in the main direction of my preselected guiding star. This works for me by giving me a deadline, giving me motivation and helping me further learn or develop in the right direction. And it does so in small incremental tasks. This has been a great way for me to move the bucket forward a few steps at a time.

2. My strengths as amplifiers

The better aligned my personal strengths are to my focus, the bigger the effect.

I need to remind myself always about my strengths to properly assess my projects. It is tempting to try something completely new. Sometimes I believe I would enjoy this new project or that I may have a hidden skill for something akward. But in this process, I always end up finding that only one or two options seem greatly amplified by my current strengths. When my strengths seem aligned, priorities are obvious when compared to other possibilities.

Strengths can be defined in many ways. In this case, I try to give equal weight to two kinds of strengths: my natural strengths (defined as those activities in which I have consistent near-perfect execution) and my historical strengths (based on my personal history and experience).

Natural Strengths

My natural strengths include those activities where I naturally excel. For example, in my case I consider myself to be a great synthesizer, an outstanding communicator and a very quick learner. To unveil the last two of these strengths I found of great help a book called “Strengths finder 2.0” by Marcus Buckingham, I highly recommend it. In a video also by Marcus called “Trombone player wanted” he further defines a strength as “anything you do that makes you feel stronger.”

This is exactly what happens when I finish synthesizing a new concept, giving a talk or learning something new. I feel great. If I am doing any of these activities I finish highly motivated, refreshed and strengthened by them, even if I have stopped eating or sleeping in the mean time.

When evaluating future projects or redefining my focus I require all options to build upon my natural strengths.

Historical Strengths

Similarly, we have what I call historical strengths. These strengths are the accumulation of experiences and recognition in certain aspects of life. The more you have done something, the easier it will be to continue doing it.

I started working and earning money with computers since I was eleven years old. I continued to found eight technology companies. It is safe to assume that I have a lot of recognition and experience in this field. In fact, every time in life I have tried to do something unrelated to computers I have quickly ended back where I feel comfortable, where other people trust my experience and where it is easy for me to earn money.

At one stage in my life I studied drama for a year and loved it. But at the same time I had a computer-related business that demanded more and more of my time. I may have ended up being a good actor, but people would come to me with new business or software ideas, not once with an acting role.

My reputation in the industry and my experience founding and growing companies have become strengths. Within them, there are specific niches and technologies that also strengthen as the result of my direct involvement in them. As a consequence, some of my main historical strengths today would be: credit card processing and fraud prevention, data science and machine learning, as well as information security and incident response.

And if you review the type of companies I have managed and grown, a clear pattern will also emerge: service oriented technology companies for the financial and corporate sectors.

Business contacts, projects, investors, clients, suppliers, media reporters, talks, Internet references, contributions, resume and experience are all related and part of these strengths.

By building on top of your existing historical strengths, project and goal accomplishments are easier and faster. That is why experience and historical strengths are always considered when defining my projects and focus.

3. Economic Feasibility

I try to always focus on personal growth. At different moments it has had different motivations or end goals. But whatever it may be, it always has to be economically realistic. If I use my savings, I should make sure I have enough. If I use my spare time, I have to plan on doing so without affecting my family or work. If I get my company involved, it should be a good business for us. And if I use my reputation, that also gets spent.

My father once taught me that money, free time and reputation could be seen as three types of resources that could be exchanged for one another. It has proven to be true for me. I have spent my free time accumulating reputation that I then spent to earn more money. These resources are assets that you accumulate or have available through time and that you can invest if you have a surplus.

I used to believe that by accumulating enough money I would then be able to do what I really loved. It seemed like a good and easy intermediate goal. I thought I could realign my life to my passions once I had the economic stability to make it happen. But it turned out that money was never enough. The more I earned, the more I spent and the more I invested. And in the process of making money I would lose my focus, my congruence and the very purpose that had set me off in that direction.

Money should never be the end goal, but at the same time, required resources should always be considered.

Anything I have wanted to do or to accomplish has always had an economic repercussion. Even if it is measured as free time spent on something, or hard earned reputation that is being invested, all prolonged efforts require an economic foundation for them to be feasible. Free time and reputation come at a cost and that should also be considered.

I therefore always add a resource indicator as part of my focus and project analysis. I want to know how much time, reputation and money it costs and I need to define how I plan to allocate those resources.

Defining my Personal long-term Focus

Defining my long-term focus is an iterative process. Every time I reassess the projects I would like to embark on my long-term focus has to shift as well.

I generally start by writing down all the personal or professional projects I would like to work on. It can be anything, from researching a topic or writing a book to traveling around the World with my family.

Then I define in which of them I will be able to sustain motivation, how they relate to my strengths and how will the resources get allocated. This process allows me to consider all aspects and prioritize the projects.

This time around it was easier than ever. I have a long list as always but I have a project which is amazing. It is so aligned with my personal focus that it becomes a life changing experience.

I realized it has all three of my motivation engines. I have had a highly motivated “collaborator” since the beginning. I have a “paying customer” that wants to invest in it. And the project is so interesting that it will allow me to “sequentially” give conferences and write many blog posts.

From my historical strengths perspective this “artificial-intelligence-based credit-card-fraud-prevention solution” brings together most of what I have been doing over the last fifteen years: credit cards, AI, data analytics, security and incident response. I have the accumulated skills and experience to probably be the best in the world to do this.

My natural strengths are all highly attuned as well. It is something in which I will continuously need to learn, synthesize and communicate.

Finally from a resource perspective, we are in the process of securing a two year contract that will pay for all the research and development.

I currently feel very fortunate and humbled by this opportunity. It even seems to good to be true sometimes. All the other options in my list seem inadequate or irrelevant when compared to this one.

This project has now reset my personal long-term focus. It is so right for me that I feel it has become my new life project.

I guess this is what happens when your motivation, strengths and resources are truly aligned. Nevertheless, I am still suprised; it continuous to feel like magic.

How should an entrepreneur write about his work and contributions? I was asked to write a short essay of my own experience and accomplishments. I originally tried explaining my work experience in a chronological order but it ended up being too long. So I rewrote it to enumerate the main lessons I learned along the way. The end result exceeded my expectations. I realized once more that writing directly from my experience is easier and far more fulfilling.

Victor Chapela – My Work History.

It is almost impossible to separate my work history from my personal development. My professional life has been a continuous learning experience. Like a giant rollercoaster ride; full of surprises. It started off as something that was a lot of fun, something I would even have payed to do. Somewhere down the road, probably when I started believing myself to be successful, work became all too serious. It was suddenly all about being more successful. Then, the Internet bubble burst and I had to start all over again. It was that very hard process of coming back, full of life changing experiences, that allowed me to start enjoying the ride as opposed to trying to win the race. These experiences also helped me realize that the more you give, the more you receive in return.

On having fun.

I started working very young, as an eleven year old kid. I taught advanced software development to teenagers. I taught them by doing what was fun, by developing games together. I didn’t think of it as a job, I was playing. It took me many years to come back to this very basic way of relating to work and life.

On having the right partners.

I have had many different partners in all the ventures I have founded or been a part of. By far the most important features that must be shared is a common set of values and the same long term goal. Even with highly intelligent, ethical partners, the worst problems arise when the end goal is different.

On being too serious.

Ego is the main culprit. We want to feel important. Having bigger problems feels like being more important; having more employees feels like being more important; being busy all the time also feels like being more important. We end up being too serious about it all and we fail to notice what really matters.

On planning.

There is a Chinese proverb: luck is when preparation and opportunity meet. When leading, being prepared is your most important duty. Opportunities are beyond your control. Planning should be focused on being prepared to jump on opportunities; planning should never be meant to try to control or generate the opportunities.

On focus.

The more simultaneous ventures I was involved in, the worse they all went. I see it as a vector sum. If all the arrows point in roughly the same direction, the resultant grows exponentially. If your efforts, ideas and energy are spent in diverging projects or companies, they nullify each other.

On helping.

I now focus on helping out as much as I can; I help my clients with the best service or product we can come up with; I help my country with my time, effort and ideas; and last, but not least I help my family and friends by enjoying life with them.

I strongly believe today life is not to be taken too seriously. The more you enjoy it, the more you help and the more fun you have, the more rewarding your work will be as a result.

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I had been planning on starting my blog for quite some time now. A strong need had been silently growing to share my thoughts and experiences. But until now, I had found no time to do so and I was confused about the topics and concepts I wanted to write about. I felt my brain sitting in a word freezer.

Then, something happened that broke through the ice. I was asked to write an essay about my work history. Something that should have been straightforward became a daunting task. There was a restriction to keep it down to 500 words. All my experiences, thoughts, challenges and successes had to be reduced to under one page.

At first, I thought it would be easy. I was working in an airplane; I had plenty of battery and a long flight ahead. I started by writing my life history in a chronological order. My plan was to then summarize it into a final document. I started typing away while I sipped my apple juice and listened to some new age music.

After a few refills I checked the word count. I was shocked. I had already written over two thousand words and I was nowhere near the end. I realized I would never finish it if I were to continue down that path.

I decided to start all over again. I had no particular plan but knew I should focus on those things that were important to me. Words started to flow from experience instead of trying to explain why or how. It was all structured effortlessly. It was almost magical. And when I finished and read through it, I was amazed to discover that I felt it needed no changes. It was good to go.

That essay lit the fire I needed to get started writing my blog. I decided to write about my experiences and not about theory. I also decided to write about what is really important to me and not about specific topics.